Stevens defies critics on rate rises

Glenn Stevens used his first public speech in two months to reiterate the central bank’s confidence in the nation’s growth prospects.
Photo: Rob Homer

by
Adrian Rollins | Economics correspondent

Reserve Bank of Australia governor
Glenn Stevens
has warned that interest rates are likely to rise despite business leaders urging the central bank to stay its hand, amid evidence that ­consumer confidence has slumped to its lowest point in two years.

Mr Stevens used his first public speech in two months to reiterate the central bank’s confidence in the nation’s growth prospects, and cautioned that while there was a widening gulf in conditions across the economy, rising demand pressures would call for “some degree of restraint".

“I think there is a real fragility in the bulk of the Australian economy at the moment," Mr Goyder told The Australian Financial Review.

“I think further interest rate rises on the back of the ones we’ve had already, on the back of rising energy prices, will certainly not do anything to help confidence."

Mr Little said interest rate fears were weighing on household spending, making conditions outside the mining sector difficult. He added that “a stable interest rate environment this year would provide greater ­confidence for consumers".

The speech by Mr Stevens was an opportunity for the governor to tone down the central bank’s monetary policy rhetoric following evidence that the economy suffered its deepest quarterly downturn in 20 years early this year while jobs growth has lost momentum, house prices have fallen and consumer confidence has slumped to a two-year low.

Instead, Mr Stevens told an Economic Society of Australia function in Brisbane yesterday that the forces driving growth, particularly surging global demand for commodities, had continued unabated and the challenge for the country was to adapt to the changes these brought with them.

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“The degree of slack in the economy overall does not seem large in comparison with the apparent size of the expansion in resources sector income and investment now under way," Mr Stevens said. “It follows that macro-economic policies must be configured in the expectation that there will need to be some degree of restraint."

Prime Minister
Julia Gillard
backed Mr Stevens’s upbeat assessment of the economy’s prospects in a speech to a forum of company chief executives in Canberra yesterday.

Ms Gillard said that although the extent of “differential patterns of growth" in the economy could not be underestimated, the opportunities presented by Asia’s growth were ­enormous.

“We know the mining boom will place strain on those firms exposed to currency fluctuations," the Prime Minister said. “[But] we are entering an age of opportunity. An era of growth where the risks are greatly outweighed by the benefits, provided we get the big calls right."

The RBA warned early last month that interest rates were likely to rise, but at its meeting on June 7 the central bank board decided to keep the official cash rate steady at 4.75 per cent.

Uncertainty about the strength of the economy has fuelled speculation that monetary policy will not be tightened until at least August.

Markets have dismissed the chances of a rate rise next month and put the odds of a rise of 0.25 of a percentage point in the next 12 months at just 58 per cent.

But RBC Capital Markets senior economist Su-Lin Ong is among those who think investors are underestimating the likelihood that monetary policy will be tightened, warning of “modest" rate rises in the year ahead.

In remarks that have been interpreted as reducing the risks of a rate rise on July 5, Mr Stevens said economic data would be important for the RBA in assessing the timing of the next rate move, highlighting official consumer price index figures for the June quarter due on July 27.

Mr Stevens made clear yesterday that the federal government was helping reduce the interest rate risk, observing that fiscal policy was playing a “significant role" in restraining price pressures because its fiscal impact would be worth minus 2 per cent of output next financial year.

While the timing of the next rate move is open, Mr Stevens indicated that the central bank’s thinking on the need for tighter monetary policy had not changed.

“The underlying rate of inflation is more likely to rise than fall over the next couple of years," he said.

“This central expectation suggests, as we said [in early May], that further tightening of monetary policy is likely to be required at some point."

Mr Stevens said that despite perceptions, the benefits of the mining boom were spreading through the economy. About half of all the money invested by mining companies was spent on local goods and services, and they also drew heavily on local suppliers to ­sustain much of their day-to-day ­operations.

He added that much of the boost to national income that the boom was providing was being channelled through the sharemarket, swelling superannuation accounts.

But he acknowledged that growth in emerging Asia was driving structural changes in the world economy, to which Australia was not immune.

Mr Stevens said the country was benefiting from a mismatch between global supply and demand for minerals, energy and food that had helped force the nation’s terms of trade 85 per cent higher than their average last ­century.

He admitted the changes being wrought by this structural shift in ­global economic activity were forcing painful adjustment on parts of the economy, such as manufacturing and tourism. But he offered little solace to those bearing the brunt of such change, apart from improving ­productivity.

Mr Stevens said “there are no magic-pill solutions, nor are there any real alternatives to adjustment".

“What solutions there are, though, are likely to involve a refocusing on productivity performance after a period in which, at least at a national level, our productivity growth has been disappointing."

The Australian dollar gained half a US cent after Mr Stevens’s speech reaffirmed that more rate rises were on the way. It was trading at $US1.0688 late yesterday, up from $US1.0635 on Tuesday.